To cut taxes, cut middle-class welfare and concessions

John Howard
ended his term as treasurer in the Fraser government with a top marginal tax rate of 60 per cent. Labor treasurer
Paul Keating
cut it to 47 per cent. After Howard became prime minister in 1996, he took 10 years to cut the top rate to 45 per cent. He could have made deeper cuts across the board if he had not greatly expanded handouts and tax concessions to those who could afford to fend for themselves.

He also relaxed the means tests on pensions and the seniors health card, and applied none at all to new handouts such as the baby bonus, family tax benefit (B) and private- health insurance rebates. He also made all superannuation payouts and earnings tax free in the draw-down phase from age 60, and did the same for most other income after 65. These concessions, and those at earlier ages, narrow the tax base and make overall tax rates higher than otherwise necessary.

Although Treasurer
Wayne Swan
has made some savings, projected expenditure on social security and welfare is $139 billion in 2014-15 and more than $150 billion on tax concessions. If Coalition Leader
Tony Abbott
becomes prime minister at the next election, these figures suggest he could make large savings without hurting anyone in genuine need by applying his principle that “government should do for people what they can’t do for themselves and no more".

One starting point would be to include the family home in the means test for the age pension, as suggested by the Henry tax review and the productivity commission.

At present a couple can have more than $1 million in assets (excluding their home) and an income of $1643 a week, yet still get a part pension, plus prescription drugs for one-sixth the price for low-income employees. On the tax side, the commission says the super concessions “offer the greatest benefit to those with the greatest capacity to save".

Unfortunately, the Henry review’s much applauded approach to reform makes it harder to cut marginal rates. The review said a key finding was that it can be “more efficient to impose higher taxes where fewer people are subject to them, such as at very low and very high incomes . . . [and] higher rates on people whose behaviour is relatively unresponsive to tax rates, such as prime-age men and women who are not caring for children".

Perhaps these conclusions apply to careerists. But the review’s support for leaving the top rate at 45 per cent can be seen as giving talented people an incentive to leave Australia, while discouraging entrepreneurs from creating new businesses and driving innovation.

The review also proposed increasing the existing 15 per cent marginal rate to 35 per cent for those between $25,000 and $37,000. The increase was only needed to help fund its proposal to narrow the tax base by lifting the tax-free threshold to $25,000 at a cost of about $140 billion over four years.